EU RATES ROUNDUP: Bearish Duration Bias, Short EUR Front-End
(Bloomberg) -- Short duration bias on EUR rates remains among strategists; Barclays expresses via short 10y OAT, BNP with short Bobl, JPMorgan through short 30Y Bund and 7s15s steepener.
- Despite dovish repricing of the front-end over last week’s ECB meeting, JPMorgan, Barclays and Citigroup all stick with bearish front-end trades, while Morgan Stanley is the outlier and recommends going long June 2018 Eonia.
- Barclays (strategists including Cagdas Aksu)
- ECB played it safe and left market guessing on forward guidance change at the June meeting; ECB seems to want the market not to doubt its dovish forward guidance this early on
- ECB outlook still toward a less dovish policy later this year; together with election risks being much lower now, stick with bearish-biased trade ideas such as reds/greens EONIA steepeners
- 10y French spreads are priced in for a Macron win and unlikely to sustainably tighten well below 50bp; hold short 10y France trade mainly as an expression of a short-duration view
- Gilt 10y spreads have performed strongly due to ongoing paying flow in long-dated swaps; weakening VAT receipts, political reluctance to tighten fiscal policy, looming supply can tighten 10y spreads in the short term
- Citigroup (strategists including Harvinder Sian)
- Dovish move in EONIA forwards in reaction to static forward guidance from ECB should prove short-lived as Staff forecasts increasingly reflect the stunning growth signals; markets are too far skewed against any rates/sequencing discussion
- Continue to hold 1y mid-curve puts in Euribor and pay EUR 2y fwd 1y vs NZD
- Expect OAT/Bund spreads move to consolidate around 45bps level, with full evaporation of any lingering Le Pen risk on May 7 can support spreads further; over longer- term, ECB remains the dominant driver of spreads
- Good level to fade steepness of euro HICPxT 10s30s; long-end linker supply from Italy, Germany in near term, if swapped, can weigh on long-end, flatten 10s30s; further, with inflation having peaked in April, liability driven investment demand is perhaps going to run out of steam soon
- BNP (strategists including Eric Oynoyan)
- Close short 10y Spain which was more punitive in cash, and now express bearish view via short 5y Germany, as political uncertainty since the first round of the French election fades
- Recommend selling Obl April 22 at -0.35% on any move to -0.40%, targeting -0.1% by late 3Q; stop at -0.45%
- Belly of the German curve is very exposed to a less dovish tone from ECB board member
- Recommend going long 10y OAT vs 50/50 weighted Bund and SPGB; OAT looks cheap after rising back to high levels last seen during the pre-crisis period, now at -26bp, vs -56bp average during the 2015-2016 ECB QE period: MORE
- JPMorgan (strategists including Fabio Bassi)
- With first round of French vote, ECB risks now passed, the market will focus on the U.S., prefer to reduce risk on positions; hold short in 30Y Bund and 7s15s steepeners, but close 2s5s steepeners, turn broadly neutral on front-end
- Reduce intra-EGB tightening exposure, close long basket in 10Y France, Spain, Italy vs Germany
- Macron presidency is very likely and remaining political events elsewhere are unlikely to be important drivers, this opens window for 10Y+ issuance, like 10s30s steepeners in France and Portugal; in Italy, Spain the 10s30s curve is already pricing likely pressure coming from supply
- ECB to move the growth risks to balanced at the next meeting in June: hold June 2018/Sept. 2018 ECB OIS steepeners, roll Dec. 2017/Dec. 2018 into Dec. 2017/Dec. 2019
- In the U.K., recommend entering Sept. 2017/June 2018 short sterling curve steepeners given lack of risk premia; also hold reds/greens SONIA curve steepeners
- Deutsche Bank (strategists including Francis Yared)
- Expect global core curves to (mildly) bear steepen, reiterate 75bps year-end target for the Bund, based on gradual removal of ECB accomodation
- Short-term, see limited catalysts for big moves in EUR rates over the next few weeks, should result in lower volatility and moves higher in rates led by inflation breakevens rather than real yields
- Elevated level of volatility, rich payer skew leads us to recommend a zero cost 1x2 6-month 5-year payer spread
- Maintain short 3Y France, 5s30s steepeners in Italy, EUR 1Y fwd 5s10s steepeners, long 10Y EUR inflation breakevens and Euribor-Germany 10Y ASW widener vs 30Y tightener
- Morgan Stanley (strategists including Anton Heese)
- Valuations are still not cheap but find it difficult to imagine 10y Bund yields rising more than 20-30bps unless there is a considerable shift in the inflation outlook, shifting ECB policy expectations
- German funding markets remain tight due to the scarcity PSPP has created, and as long as German GC stays around -60bps, difficult to see how Bund yields can rise significantly
- Still like being long 2y Schatz spreads, to benefit from collateral scarcity, now suggest receiving June 2018 Eonia, as market already prices 9bps of rate hikes by June, while ECB are not expected to raise rates before Sept. 2018
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Anton Heese (Morgan Stanley)
Cagdas Aksu (Barclays PLC)
Eric Oynoyan (BNP Paribas SA)
Fabio Bassi (JPMorgan Chase & Co)
Francis Yared (Deutsche Bank AG)
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